Dive Brief:

• State officials in New England filed comments last week at the Federal Energy Regulatory Commission opposing a plan to provide ratepayer financial support for a large gas plant in Boston.

• Connecticut utility regulators argued that plant owner Exelon exercised unfair market power in its push to secure cost recovery for two units at the 1700 MW Mystic Generating Station. They and the Attorney General of Massachusetts argued the level of financial support it seeks is also too high.

• Independent generators also questioned provisions of the Mystic proposal, but Exelon and ISO-NE maintained that the plant is essential for winter grid reliability and contains sufficient oversight to protect consumers.

Dive Insight:

Debate over the Mystic plant illustrates how pipeline constraints in New England are pushing the region into unconventional solutions to preserve power reliability in winter.

Earlier this year, ISO-New England asked FERC to approve cost recovery for the Mystic plant, which would in turn support the continued operation of the Everett liquified natural gas import facility, which supplies it with fuel.

If Mystic and the Everett LNG facility shut down, ISO-NE predicted that it could see reliability problems in winter, when natural gas supplied by pipelines is diverted for home heating.

FERC rejected that request, saying Exelon's justification for cost recovery based on the Everett facility was too broad. But they directed the company to reapply for cost-recovery on an expedited basis while ISO-NE devised broader market changes to value plants with onsite fuel supplies, like Mystic.

That decision touched off weeks of evidentiary hearings at FERC last month in hopes of finalizing a cost recovery agreement before ISO-NE's 2019 capacity auction, from which Exelon had said it may withdraw the Mystic plant if its cost recovery was not assured.

Connecticut regulators say the process was backwards. Because ISO-NE released a fuel security analysis identifying Mystic and Everett as essential units before entering into negotiations with Exelon, the plant owner was able to dictate terms of the agreement.

"Exelon consistently pressed that advantage," the Connecticut Public Utilities Regulatory Authority (PURA) wrote. "In negotiations, Exelon compelled ISO-NE to break with past practice by signing the [cost of service] agreement prior to its submission [to FERC], and dictated key substantive contract terms."

Exelon's leverage continued in its negotiations at FERC, PURA argued, when it pressured federal regulators to accelerate hearings on its cost recovery proposal before the next capacity auction.

"Exelon … threatened retirement unless it was told, before the next [auction], exactly how much money it would receive under the [cost of service agreement]," PURA wrote. "The Commission agreed to this demand, requiring the intervenors and the Presiding Judge to undertake an extraordinarily expedited hearing process, completing in roughly two and one-half months what would normally take anywhere from 8-10 months."

While Mystic and Everett may be necessary for fuel security, PURA argued that Exelon's threat to shut down the plant is a "charade."

"Once the Commission sets a just and reasonable rate for the two-year term of the [cost of service agreement], the Mystic resources are unlikely to retire even after the expiration of the agreement," PURA wrote, citing evidence from the FERC hearings that was redacted in public comments.

Under ISO-NE's proposal, Exelon would receive cost recovery for both Mystic and Everett, along with a credit for part of the profits for any sale of LNG from Everett to a third party. The grid operator argues the credits are essential to incentivize Everett to provide gas for the region, but states criticized the plan.

Instead of providing cost recovery for all of the Mystic and Everett costs, PURA argued that "only the portion of Everett costs in proportion to Mystic's usage should be allocated to Mystic."

"[T]he absence of 'available market alternatives' to the [cost recovery agreement] does not justify foisting all Everett costs on ISO-NE ratepayers," PURA wrote. "Instead, it demonstrates only that Everett's owner controls a facility essential to Mystic's continued operation and has market power over Mystic — which it is using to allocate costs unfairly to New England ratepayers."

Massachusetts Attorney General Maura Healey echoed that argument, writing that the two Mystic units slated for cost recovery can only use part of the Everett output.

"The record shows that Mystic 8 & 9 can use no more than 39.16% of Everett's output," Healey wrote. "Permitting Mystic to recover the costs of Everett in this manner would distort several crucial market signals and remove the incentives for Mystic to operate Everett in an efficient and economic manner, thereby harming regional fuel security and the New England wholesale electric market."

If FERC does approve cost recovery for the facilities, Healey argued the return on equity (ROE) awarded to Exelon should be decreased due to its "equity heavy capital structure."

"Mystic's proposed 10.71% ROE is the median of the upper half of range of reasonableness ... which fails to follow Commission precedent," she wrote. "Proper application of Commission precedent produces a ROE of no higher than 8.22%."

Exelon said in its comments that its ROE calculation is just and reasonable and defended ISO-NE's plan to give it credits from third-party LNG sales.

"The modest return that Mystic seeks for operation of a risky business such as Everett that is essential to the region's fuel security is just and reasonable, even with the potential for Mystic's affiliate, Constellation LNG, to earn additional profits from taking on the additional risks associated with third party sales," Exelon wrote.

The Mystic cost recovery proceeding is unfolding alongside a separate FERC docket focused on longer term fuel security solutions for ISO-NE, set up when regulators dismissed the original Mystic proposal.

In August, ISO-NE proposed to treat Mystic as a "price taker" in its next three capacity market options, not allowing it to set price. Generators and environmental groups criticised that proposal in comments to FERC last month, saying it retains too many resources.

FERC aims to rule on both proceedings before ISO-NE's next capacity market auction in Feb. 2019.